Wednesday, June 1, 2016

Can OPEC Convince the World that the Glut's Over?

This week in energy, investors are gearing up to digest the proceedings of the next Organization of Petroleum Exporting Countries in Vienna. As oil prices appear to stabilize, the group of oil exporters may have more room to breathe going into the latter part of 2016. The output freeze discussion has finally withered down to a whisper as most oil ministers dismiss the idea entirely. In fact, the consortium may be more similar to Pamplona as the bulls rush to the table looking to win the race to more market share. The worst appears to be behind OPEC as its members look to maintain the fragile equilibrium of price stability while trying to pump as many barrels as possible. We've already seen Chevron act on their bullish outlook in the Tengiz oil field. Now, oil exporting nations begin to play their own trump cards as price improvement encourages an aggressive reentrance in the market.


In OPEC's monthly oil market report, it featured the developments of "non-OPEC oil supply" as if pleading for more bullish sentiment behind the current price trend. Spot prices in Europe and North America have been steadily increasing, a fact that has been well covered, but few have pointed out the steep recovery in the OPEC basket price. From its trough in late January 2016, the member countries have seen their personal spot price grow by over 100 percent putting the price less than $20 from its peak in March 2015. A doubling of revenue coming into these economies has encouraged a bullish viewpoint, and in turn, has caused OPEC to advance their perspective in the investment world. Articles featuring the decline of non-OPEC supply are not coincidences. They represent the analysis and data that oil exporting countries want observers to imbibe so that they can push their agenda of higher production under higher oil prices. So don't be surprised if representatives at Thursday's meeting spout off bullish proclamations. No matter what is said, the fragility of the oil cartel remains, teetering on the volatile levers that control each nation's oil spigot.

Kuwait has chosen to be a part of the optimistic convoy to come through Vienna. Over the weekend, the head of the Kuwaiti national oil company, Wafa al-Zaabi, announced an investment of $115 billion in the local oil and gas industry in the next five years. According to the Economic Times, al-Zaabi said "We have earmarked 34.5 billion dinars for spending on oil projects over the next five years. Over 30 billion dinars ($100 billion) will be spent on the local market and the rest abroad." Most of the spending will be allocated for the exploration of new reserves, and what's leftover will be used to expand refinery capacity with a new "615,000 b/d refinery." Kuwait hopes that these long-term goals can be achieved by 2020 so that production of crude oil and natural gas can reach 4 million b/d and 2 billion bcf /d respectively. Since the beginning of the oil glut in 2014, Kuwait Petroleum Corp has had to mitigate any growth in output with a small drop off of in 2016. In April, the country's production fell 132,000 b/d to its lowest point in the past two years. As non-OPEC production falls, Kuwait is just one country among many of the oil exporting members that are looking to fill that newly created hole. Representatives of this small Middle Eastern country will be rushing to Vienna like bulls at a rodeo. The signal of increased output and a whole new capital expenditure program was not coincidentally timed before Thursday. Instead, Kuwait hopes to establish an early resistance against any talks of an output freeze and, perhaps, any cohesion at all.

Kuwait is not the only major country betting on the price rebound scenario in their dealings with the oil cartel. The oil minister of the United Arab Emirates has openly supported a bullish outlook for the energy markets in the near future. Suhail bin Mohammed al-Mazroui from the UAE told reporters, "We are optimistic. We are seeing that the market is correcting upward," according to CNBC. While it's not clear whether Mazroui referred to his own country or OPEC in entirety when he said "we," a clear bullish interpretation is put forth by the leader of over 2.5 million b/d worth of production. After peaking in 2015, the United Arab Emirates is slowly adding more to its capacity with 56,800 added in April of 2016. His use of the word "correction" is quite interesting because it suggests that OPEC thinks the markets were illegitimately priced in the low $40's (or $30's if you're talking about the OPEC basket price). Once again, it's not clear whether the diction was purposefully worded to encourage bullishness or it accurately reflects the analysis and outlook which the UAE and other member countries currently espouse.

The Venezuelan government has voiced its concern with OPEC leaders' decision to not cut production and support prices. When an output freeze fell through, the South American country felt undermined by its "economic allies" in the cartel as it succumbed to deficits in the low oil price environment. Wednesday, though, the energy minister, Eulogio Del Pino, abandoned his concerned position for a pro-OPEC perspective saying, "Production has been frozen ... Because if you see the decline in the non-OPEC and all the situation that happened in several countries, production has been maintained the same in the last three or four months," according to Reuters. He's only partially right. Most established producers like Kuwait, Saudi Arabia, the UAE, Qatar, Algeria, and others have limited their output growth with some even reducing it. However, Iran and Iran continue to push their own individual agendas adding a combined 352,2000 b/d worth of production in just the month of April. Venezuelan officials will be completely off the mark if they plan on going into Vienna looking to maintain a "de facto output freeze." Like Iran and Iraq, other smaller member nations will be looking to graduate to a more aggressive oil and gas policy with OPEC support or without it. Iraq itself has said it wishes to export 5 million more barrels in June according to OilPrice.com. If the South American oil giant plans on coming to Vienna looking for a compromise, it will find itself leaving empty handed with the newly available market share going elsewhere.

What? Available market share? That's right. A fellow member nation has fell under the pressure of military conflict as local militants have targeted wells in Nigeria. As of Wednesday, two of Chevron's wells have been attacked in attempts to sabotage the Nigerian oil capacity according to the Financial Times. The conflict has all together brought production down from 1.9 million b/d in 2014 to just over 1.6 million b/d in April. Additional uncertainty surrounds the likelihood that capacity will be repaired or that more production will be lost. The Nigerian conflict will provide the cherry on top of the mountain of bullish sentiment that various OPEC members are bringing to the table. Predictions? An output freeze will be wholeheartedly denied with those words never to be uttered again by Saudi Arabia and the other cartel members. Instead, the meeting will be centered on presenting the optimistic case to the world. In short, the glut is over and demand is rapidly overcoming the deficit we once saw grow. Be prepared for the oil cartel to once again attempt to manipulate the energy narrative in their favor with non-OPEC supply reductions headlined in glitter and gold. At the same time, don't be fooled. U.S. oil companies will be more than happy to reverse the trend when prices recover sufficiently. Couple that with bullish bets from Kuwait, the UAE, Saudi Arabia, and other member nations, and one will find themselves right back where he started.

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